Mortgage rates could drift lower in coming weeks

Red percent sign in a crack

Forget everything you've heard about how difficult and costly it is to get a mortgage right now.

The great majority of borrowers are getting loans and at surprisingly affordable rates.

The most popular mortgages are already cheaper than they were last September and those rates could drift lower in the coming weeks after the Federal Reserve moved to push interest rates lower on Tuesday.

Our most recent survey of major lenders found the average cost of a 30-year, fixed-rate loan is less than 6.3% and the typical 15-year mortgage costs less than 6%.

Our extensive database of the best mortgage rates from across the country lists lots of lenders offering 30-year loans for 6.0%, and 15-year loans for 5.625%, with fees of $1,000 or less.

Looking back over the last 20 to 30 years, that's almost cheap.

The typical mortgage cost 7% or 8% during the mid- to late-'90s, and double-digit rates were the norm throughout the '80s and early '90s.

In fact, mortgages don't cost that much more than they did four years ago, when 30-year rates bottomed out at 5.28% -- the lowest they've been since (and its print predecessors) began its weekly survey of major lenders in 1985.

All of the turmoil you've heard about in the mortgage industry -- lenders going out of business, thousands of employees being laid off, soaring foreclosure rates -- is very real.

But that crisis has hurt only two types of borrowers:

Here's why:

Banks and finance companies obtain much of the money they loan for mortgages from two government-chartered companies -- commonly referred to as Freddie Mac and Fannie Mae -- or large private investors such as retirement plans, hedge funds and insurers.

Those investors panicked at the prospect of billion-dollar losses because a growing number of homeowners are defaulting -- primarily on ARMs given to borrowers with poor credit from 2004 through 2006.

Almost everyone blames this mess on lax lending standards and a screwed up system that rewarded mortgage brokers for pushing loans that borrowers had little or no chance of repaying.

As a result, Freddie Mac and Fannie Mae have tightened the requirements for borrowers with poor credit, requiring larger down payments, higher incomes, fewer debts, and the ability to fully document all of that.

Private investors have gone much further. They've virtually stopped lending money for subprime mortgages and dramatically reduced funding for all other types of loans.

Since Freddie Mac and Fannie Mae aren't allowed to buy mortgages for more than $417,000, that's made jumbo loans more costly and difficult to get.

The Federal Reserve, which acts as a sort of super-bank for the commercial banks we deal with every day, tried to help on Tuesday by making it cheaper to borrow.

The Fed's rate-setting committee lowered its target rate for most consumer loans down a half point -- the first decrease in more than four years -- and indicated further reductions are possible before the end of the year.

That will exert downward pressure on mortgage rates, although the Fed's action may not be immediately apparent when we take our next weekly survey of major lenders on Wednesday.

Our most recent survey taken Sept. 12 found the average:

That means you'd have to pay $618 a month for every $100,000 borrowed with an average 30-year loan. That's $10 a month less than you'd have paid this time last year.

What about ARMs?

It's not surprising that they remain more expensive than last year. With adjustable-rate loans accounting for the great majority of delinquencies and foreclosures, lenders see more risk and are demanding higher rates.

Our survey found the average cost for 5/1 ARMs -- a 30-year ARM with an initial rate guaranteed for five years and resetting each year after that -- is now 6.30%.

The major reason borrowers opt for an ARM is to get lower monthly payments. At least for a while.

Since the difference between ARMs and fixed-rate loans is so small right now, we urge you to go for fixed-rate financing. You'll know you've got a loan you can afford and never lose a night's sleep worrying about higher house payments.

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